Confectionery group Cadbury, one of Britain's best-known companies, has rejected a £10.2bn takeover from Kraft, the American food giant.

In a surprise statement to the London Stock Exchange this morning, the US company, whose brands include Oreo cookies, Toblerone chocolate and Dairylea cheese, said the deal would create a "global powerhouse" in snacks, confectionery and ready meals, with total revenues of $50bn (£30.5bn) and leading positions in key developing markets including India, Mexico, Brazil, China and Russia.

Shares in Cadbury soared more than 38% in early trading to 786p, a gain of 218p, making the company the biggest riser on the FTSE 100 index. The news also boosted shares in other food groups across Europe, including Unilever, Nestlé, Danone and Lindt.

Kraft, the world's second-largest food maker with annual revenues of $42bn, appealed directly to Cadbury's shareholders after Cadbury's board rejected its proposal. Kraft stressed it was committed to working towards a recommended transaction and to maintaining a constructive dialogue.

Cadbury put out a statement mid-morning, confirming it had received an "unsolicited" proposal from Kraft which is conditional on financing and due diligence. "The board of Cadbury reviewed the proposal with its advisers and rejected it," it said. "The board is confident in Cadbury's standalone strategy and growth prospects as a result of its strong brands, unique category and geographic scope and the continued successful delivery of its Vision into Action plan. The board believes that the proposal fundamentally undervalues the group and its prospects."

Analysts at Bernstein Research said: "It makes perfect sense for Kraft to acquire Cadbury and they should do it ... subject to the right price for both parties." They described Kraft's offer as "attractive" but thought Cadbury could get much more.

Other analysts said Nestlé made the most likely contender for a counter bid, although Cazenove analysts pointed out that it would face considerable anti-trust issues and lower cost savings.

Cadbury dates back to 1824 when John Cadbury, from a wealthy Quaker family, opened his first shop in Birmingham selling cocoa and drinking chocolate. The firm makes Dairy Milk chocolate, Trident gum and Creme Eggs and has long been seen as a takeover target. Last year it spun off its drinks arm, Schweppes, to focus on the food business. Cadbury became the world's largest confectionery company in 2003 after buying up a number of gum brands, including Trident and Stride, but ceded the number one spot to Mars when it took over gum maker Wrigley last year.

Analysts at Evolution said the $23bn takeover of Wrigley by Mars created a global confectionery "powerhouse" with a 15% market share and "made a deal for Cadbury inevitable as it fundamentally changed the confectionery economic landscape".

"We think there is a reasonable chance that Nestlé and Hershey could counter bid, with Nestlé taking gum and Hershey taking chocolate." They cast doubt on Kraft's ability to fund a takeover, as its acquisition of Danone biscuits and cereals increased its debt burden to $15bn.

However, Irene Rosenfeld, chairman and chief executive of Kraft, said the group would be able to finance the deal within its existing cash and debt position, without having to sell other businesses. She also did not anticipate any major regulatory hurdles.

She added: "This proposed combination is about growth. We are eager to build upon Cadbury's iconic brands and strong British heritage through increased investment and innovation. We have great respect and admiration for Cadbury, its employees, its leadership and its proud heritage."

In a letter to Cadbury's chairman Roger Carr, published this morning, she said: "We believe that Cadbury's prospects, ability to fully realise operational efficiencies and capacity to invest are necessarily constrained given its limited scale and scope relative to larger global competitors. We see few catalysts for sustained future value creation for Cadbury as a standalone entity."

In another letter, she explained she had set out the rationale in a meeting with Carr on 28 August, and was "disappointed that [he] unequivocally rejected [the] proposal".

Rosenfeld ended her letter by saying: "We trust that our proposal makes clear our level of seriousness and enthusiasm for pursuing this opportunity. We are willing to commit substantial time and financial resources to do so."

Kraft is offering 300p in cash and 0.2589 new Kraft shares for every Cadbury share. This values each Cadbury share at 745p, a premium of 31% over its closing share price of 568p on Friday.

It estimates the deal could save at least $625m a year in distribution, marketing and product development costs.

A takeover would also boost Kraft's long-term growth targets to 5%-plus for revenue and 9%-11% for earnings per share, from its previously announced 4%-plus and 7%-9% respectively.

David Buik at BGC Partners said: "Even if it makes commercial sense for Cadburys to be bought by Kraft Foods, you can be sure that the Competition Commission will give it their best shot to stop this deal."